In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:
A) make loans to the domestic government.
B) make loans to foreigners.
C) repay the national debt.
D) repay loans to the Federal Reserve.

Question

Quizplus · Accepted Answer

In a small open economy, excess domestic saving will be used to make loans to foreigners. This is because the domestic investment is insufficient to fulfill the saving. Therefore, the excess saving will be invested in foreign countries, which will increase foreign investment and national wealth.

In a Small Open Economy, If Domestic Saving Exceeds Domestic